Beef plant: South Dakota's visa-investment program not unusual

Method of attracting foreign funds was based on 'industry model'

Nov. 7, 2013

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The Northern Beef story so far

CONCEPT: The Northern Beef Packers plant was an ambitious attempt to bolster South Dakota’s economy by slaughtering the state’s cows in Aberdeen instead of shipping them out of state. FOREIGN INVESTORS: Through years of development and false starts, most of Northern Beef’s funding came from more than 100 foreign investors under the federal EB-5 program, where foreigners could get green cards for investing $500,000 in American businesses. EB-5: The state of South Dakota worked closely with the EB-5 program. It was promoted by Richard Benda, who then was secretary of Tourism and State Development and oversaw overseas investors. State official Joop Bollen also created private companies to manage EB-5 investments. Bollen resigned the same day he signed a contract for his own business to handle the state’s EB-5 program. FEES: Private companies established by Bollen to recruit foreign investors made millions by taking a cut of the investments made by foreign investors. UNAPPROVED: Bollen began recruiting foreign investors to EB-5 projects not approved by the state. OFFSHORE: Secret investors offered a $30 million loan to beef plant through companies incorporated in the Caribbean. One document says an Asian bank supplied the $30 million. INVESTIGATIONS: State and federal officials are investigating Northern Beef, its handling of the EB-5 program and South Dakota’s economic development office. BENDA DEATH: Meanwhile, Benda died in late October from a gunshot wound. His death is being examined by authorities.

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South Dakota’s EB-5 visa program, now under federal investigation, followed “the industry model” in how it was structured and regulated, a top expert said Thursday.

The EB-5 visa program is a way for foreigners to get green cards in return for large investments in U.S. businesses. By making a $500,000 investment in a business that creates at least 10 jobs, that foreigner can qualify for permanent legal residence here. Hundreds of foreigners paid their half-million dollars into South Dakota projects during the past decade.

Michael Gibson, managing director of USAdvisors.org, said around 90 percent of all EB-5 efforts in the country use the loan model that helped fund Aberdeen’s Northern Beef Packers plant and almost a dozen other South Dakota projects. In that model, foreign investors don’t put their money directly into a business. Instead, they invest in a limited partnership, which then makes a single loan to the business seeking investments.

“The sad part is that South Dakota is completely ... standard operating practice in our industry,” said Gibson, who works with EB-5 projects and monitors them through his website, EB5news.com.

An EB-5 critic, David North of the Center For Immigration Studies, said South Dakota’s EB-5 program was different only in that it was “more exciting” than other states’ because it featured several high-profile bankruptcies of companies funded with EB-5 money.

“It’s not unusual, but it’s a dramatic example of what can go wrong with this program,” North said.

Private company normal for EB-5

South Dakota also was normal in that a private company was handling EB-5 promotion. The Vermont Agency of Commerce and Community Development says it’s the only EB-5 “regional center” in the country that’s run directly by a state government, though South Dakota’s was until late 2009. Almost all of the nearly 325 regional centers around the country are in some way private, Gibson said.

Some, such as South Dakota’s, involve a private company running the EB-5 program on behalf of a city or state. A major regional center in Pennsylvania, for example, is operating under contract with the city of Philadelphia, Gibson said.

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Others are completely private — a business seeking and receiving a regional center designation from the federal government for a purely private business project.

But any understanding of which companies are public and which are private is difficult. The U.S. Citizenship and Immigration Services, the federal agency that manages EB-5 centers, doesn’t distinguish which ones are publicly run, which are purely private and which are a public-private partnership.

“USCIS treats all regional centers the same whether private or publicly run,” Christopher Bentley, a press secretary for USCIS, wrote in an email. “Regional center eligibility is always determined on a case-by-case basis relying on the law and the evidence provided.”

Gibson said that’s a problem.

“The main issue with that is that USCIS does not release any information on who the control persons or operators are of the regional centers,” he said. “It’s very difficult for anybody, including us — this is all we do — to determine who’s behind these.”

What does seem evident to observers is that South Dakota’s regional center was among the most active in the country. Gibson said it was in “if not the top 5, certainly the top 10” regional centers in the country until recent developments.

Financial arrangements

South Dakota used to manage its EB-5 program directly. In December 2009, it signed a contract with a private company, SDRC Inc., to manage and promote EB-5 instead.

SDRC was founded and run by Joop Bollen, who until the day of the contract had been the state official recruiting EB-5 investors. The contract let him continue doing that, just switching over to the private sector.

The switch also let Bollen earn big bucks. His contracts with foreign investors involved each one paying an annual fee of $10,000 or more. With more than 800 EB-5 investors in South Dakota, those fees could add up to millions per year — plus extra money collected for expenses and a consulting agreement each group of investors had to sign.

“I would say that’s actually on the low end of the scale,” Gibson said. “In the Chicago case that the (federal Securities and Exchange Commission) took action against earlier this year, our understanding was that the fees that were being paid to the agents overseas amounted to in some cases over $150,000 per investor, and none of this was being disclosed to the investors.”

North said the EB-5 structure created a lot of opportunities for people to get paid.

“They’re middlemen, and they’re lawyers, and they’re lawyers for middlemen,” North said.

“The whole thing is a very inconvenient way of raising money. Inconvenient and awkward and therefore expensive.”

Experts say oversight needed

Both North, an EB-5 critic, and Gibson, who works with EB-5 projects, say there’s a serious shortage of oversight.

“Joop really wore several hats,” he said. “If you look at ... what they were doing, making loans, soliciting and marketing U.S. securities offerings, giving advice to investors, it looks to me like all of the activity that you would consider under an investment bank, under an investment company, under a broker-dealer and a registered investment adviser, but without any registration or regulation or oversight from anybody.”

And that’s not unique to Bollen, Gibson said.

“These kinds of structures account for the majority of offerings in our (EB-5) industry,” he said.

North said it’s not surprising EB-5 programs aren’t more heavily regulated.

“The folks who are doing the regulating and are writing the rules (at USCIS) are not investment professionals, they’re immigration professionals,” North said.

“You can expect some slippage.”

Bentley of USCIS said he was unable to respond to the criticism.

Bollen hasn’t commented to the Argus Leader or the Associated Press since news of a federal investigation into the Northern Beef plant. But he has given several interviews to the Aberdeen American News. In Thursday’s newspaper, Bollen defended the EB-5 program.

“Look at the cost-benefit analysis,” Bollen told the Aberdeen paper. “How many millions of dollars did we bring into the state and how many jobs have we created? Even the beef plant. It is too bad it didn’t make it, but that will someday become a state-of-the-art beef plant.”

Bollen also told the Aberdeen American News he didn’t know why the state of South Dakota canceled its contract with SDRC to run its EB-5 program, and he didn’t want to criticize the Governor’s Office of Economic Development in public.